Nov. 29 (Bloomberg) -- U.S. home prices won’t recover until
the economy improves enough to boost the number of households
and clear an oversupply of properties, said economist Karl Case,
co-founder of the S&P/Case-Shiller home price index.

“Normally, the way we’ve cleared the market is we’ve had
more household formation,” Case, a retired Wellesley College
professor, said in an interview today with Tom Keene and Ken
Prewitt on Bloomberg Radio’s “Surveillance.” Lackluster
economic growth has encouraged people to move in with friends or
family, meaning “demand is not going anywhere,” he said.

The number of U.S. households, a key determinant in home
sales, grew by 600,000 this year, less than half the 1.5 million
pace of 2006, when prices reached a record, according to IHS
Global Insight Inc. This year’s pace isn’t enough to absorb the
so-called shadow inventory of distressed properties poised to
come on the market, said Patrick Newport, an economist with the
Lexington, Massachusetts-based research firm.

About 6.4 million loans were either delinquent or in
default in September, according to Lender Processing Services
Inc. in Jacksonville, Florida. There were 2.2 million homes in
the process of being repossessed by lenders.

“Foreclosures are driving price declines, and when you add
a high unemployment rate to the mix, it’s a recipe for an
additional 5 to 10 percent price drop,” Newport said. “People
who lose their jobs are more likely to lose their homes later.”

Unemployment at 9%

The U.S. unemployment rate was 9 percent in October, the
30th consecutive month at that level or above, with the
exception of dips in February and March, according to the Bureau
of Labor Statistics. Measured quarterly, the rate probably won’t
begin to decline until mid-2012, according to a Bloomberg survey
of 60 economists.

Economic expansion won’t make a dent in the unemployment
rate until growth surpasses 2.5 percent, Newport said. That’s
not likely to happen until the end of 2012, according to the
Bloomberg survey.

Residential real estate prices in 20 U.S. cities fell 3.6
percent in September from a year earlier, the Case-Shiller index
showed today. That was bigger than economists’ projection for a
3 percent decline, according to the median of 32 estimates in a
Bloomberg survey. A separate gauge from the Federal Housing
Finance Agency, which measures homes backed by Fannie Mae and
Freddie Mac, fell 2.2 percent in September.

The Case-Shiller index reached a record in July 2006 after
almost doubling in six years. It tumbled 33 percent from its
peak to a March low that put homes at 2003 prices. September’s
reading is 3.1 percent above the March level.

“It’s hard to see what it’s going to take” to turn
housing around, Case said.